Of Course; Boris Will Take Cable Higher

Intermediate
  • Boris Johnson has won an incredible election victory
  • The U.K. will leave the EU on January 31st, 2019
  • The market was euphoric as the risk of Corbyn was dispatched
  • GBPUSD pair will dip first thing, but then start building new strength

Throughout the 2019 U.K. general election the Conservative Party led by Boris Johnson held a lead over the Labour Party of Jeremy Corbyn. However, the lead did appear to be narrowing as some of the heavy spending proposals of the far-left politician gathered traction among the young.

So, it is was quite a shock (pleasant for the markets) when the main television broadcasters released their major exit poll at 22:00 GMT on Thursday, December 12 to report that the Conservatives were on course for a thumping majority. Following an unexpectedly strong win from the Conservatives, Sterling gained over 2% against the U.S. Dollar, piercing $1.35 overnight! (See Figure 1).

The 80-seat majority secured by Boris Johnson was welcomed by the markets as it marked an end to the political gridlock that has stumped Parliament since Theresa May lost her working majority in 2017. It also saw off the clunky, statist policies of Labour that would have introduced many new taxes including a wealth and financial transactions levy.

However, the key point was that we can now say with certainty that the U.K. will depart the EU on January 31st, 2020. Of course, there will be much work to be done for the U.K. to secure a wide ranging free-trade deal with the EU before the end of next year.

GBPUSD Chart

Figure 1: GBPUSD 10-Year Chart    Source: www.investing.com, Spotlight Group

AS one can see from Figure 1, there is no reason to believe that we can now wave goodbye to Sterling volatility. Naturally, it will fade now that the election is over, and the nation has political security until 2024.

That said, whilst the world tends to be quiet both politically and financially at the end of December  the markets are traditionally thin at this time of year and in lean markets the unexpected can happen.

At the opening, I am inclined to sell Sterling and use up the last of the post-election euphoria. My view is reversed on a daily, weekly and monthly basis and would be long the U.K. unit.

I see the level of Sterling relative to the Dollar adopting a path between 1.3251 i.e. the 61.8% technical level of the recent range and perhaps another push higher. In such a case the 23.6% first Fibonacci extension is found at 1.3677.

Once February begins and the “Withdrawal Bill” has been ratified, traders of “cable” will shift their focus to the transition period.

European leaders are scrambling to lay down their markers, i.e. red lines for negotiations with U.K. now that the election is over. Many may envy Johnson’s new level of authority.

The trade negotiations will be demanding in detail and it is hoped that a “Heads of Agreement” can be adopted in February. That should see dialogue start in earnest with a key date for progress to be reviewed set at the end of June. At that stage there would be a deadline for the U.K. to request an extension to the 11-month transition period.

The Prime Minister does not have to dilute his plans to appease any special interest group. He will do all he can to avoid an extension and I have faith that a deal will be done as it is in the interest of the EU to strike a deal.

The U.K. had an overall trade deficit of £66 billion ($85.8 billion €79 billion) with the EU in 2018. They will not want to damage that profitable pipeline.

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d... Continued

Comments on this analysis


  1. “They will not want to damage that profitable pipeline.”.

    Sigh, wouldn’t it be nice if a 62 mil people economy had a, you know, economic strategy in place rather than hoping for the kindness of strangers?

    One could certainly argue that the enormous trade deficit is a) a sign of the weakness of the British economy that has nothing to sell that others would want to buy (try peddle financial services to Zimbabwe and India) and b) it accounts for a stunning 0.5% of EU nominal GDP and as such isn’t even a drop in the ocean.

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